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Friday, May 25, 2012

Confused Yet?

It has certainly been a turbulent few weeks for financial markets (What else is new?) and all of the news coverage paints a very confusing picture. Here a four headlines that appeared on the Wall Street Journal web site yesterday morning:

Confusing, isn't it? Durable goods orders are up, which is good news, right? On no, Greece will need to exit the Euro, that can't be good. Profits are up at large banks, yay! H-P cutting jobs, boo-hoo!All of this reminds me of a great quote that I discovered while recently reading Adapt: Why Success Always Starts with Failure, by British economist Tim Harford.Here is the quote, which is from Brigadier General H.R McMaster, spoken while he was a colonel serving in the Iraq war:

‘It’s so damn complex. If you ever think you have the solution to this, you’re wrong and you’re dangerous.’

Now, he is talking about the complexity faced by US forces in Iraq. But when looking at financial markets, we are essentially faced with the complexity of the entire global economy and all of its 7 billion participants. Now that is complex! Not only doesn't anyone know what the future holds, thinking that you do know can be dangerous to your wealth. Despite what my alma mater and yours' might say, Economics and Finance are not science, and there is no possible way to build an economic model of anything as complex as the global economy, which has endless variables--none of which can be held constant. That is we why we make no attempts to time the market, and we believe so strongly that all investors need Asset Allocation plans that keep money which is needed in the next six years out of the stock market. These same plans also need to have longer term money invested in Stocks in order to fight the very real potential loss of purchasing power due to inflation. We believe this simple approach is the best way to invest in the face of all of the confusing complexity in the world.